tv Monetary Policy and Inflation Target Panels 2 and 3 CSPAN January 13, 2018 6:13am-8:01am EST
by the brookings institution center on fiscal and monetary policy, an hour and 45 minutes. so, in thinking about this event and in what we wanted to accomplish here, what we set out to do was to have larry summers make the case why we should think about this, have a number of very experienced monetary economists who have views about what we should do, think about
what we should do. in this panel, the question was, could we get some people to -- some very different points of view, to talk about, what difference does this really make? is this worth the energy we spend on it and to whom does it matter? so we have a deliberately diverse panel. john taylor from stanford, well-known for his taylor rule, thinking about monetary policy for a long time. christian forbes from mit, until recently on the monetary policy committee of the bank of england, correct me if i am wrong, you never had a chance to raise rates, is that right? >> right. >> you tried. peter hooper chief economist of deutsche bank securities and
writing about the relationship between the fed and the congress only briefly mention this morning but is relevant given after the federal reserve exists because congress created it. as we know legs, what congress created it can take away, sarah and her colleague have a book out called "the myth of independence" tracing the history to congress. i will ask a question or two to get things going and not have the sequential opening presentations. mr. taylor, starting with you, when you give the taylor rule a guide to setting interest rates, you kind of assume a 2% inflation target is where they want to be. i'm curious in 2018, given everything you heard, whether you think that was a good idea or whether if you're doing it all over again and trying to come up with some normative ghid
to policy you would have come up with a different number? >> it's a good question. i would say just out of nowhere a 2% inflation target. there's a discussion and zero bound very much in our minds, measuring inflation. so, while we maybe thought about price stability and inflation, 2% seem like the best thing to assume. that was before the 2% inflation target was anywhere. you have to put that in mind, it just didn't come out of nowhere, lots of thinking behind it. part and parcel to that was the assumption, more of an assumption of the equilibrium interest rate, i assumed that was 2%, based on considerations
like growth rates. nobody had thought about it. the notion of an interest rate as an instrument was still foreign to many central banks. two on the real interest rate and 2 on the inflation rate gave the nominal interest rate of 4% i thought was great and larry summers described that useful for many purposes. that's where it came from. the second part of your question is what would i do now? i don't think there's much difference what we think the measurement bias is or zero bound because it's always been there. the main difference is equestc briium. i question that, not so much about the research but
uncertainty. wheelland showing how difficult it is to determine this, unusual monetary policy, very unusual and still unorthodox in other parts of the world and makes it hard to estimate. they think it's about 1 now. that suggests if you have a rule useful in current policy, i suggest to 1 or so, i think they should be doing if they think ours is 1. i have my doubts about it and we should be careful about it and it most likely will go up and should stick with that 2% inflation target. if i could say one other thing. there are many good things about the inflation target choosing it
numerically. sometimes, it's taken too much attention away from other parts of the policy. in the discussion this morning very little discussion about the reaction, implicit in the comments about strict inflation targeting. with a policy rule you don't do strict inflation targeting, there's a movement towards it. there's a worry i have the extra emphasis on the target has actually taken us away from the notion of a rule or reaction about what the central bank should be doing to achieve that target. ive noticed that to some extent. it worries me. if we continue with the new inflation target i hope we do, we find more ways to bring attention to the policies actually used to achieve it. >> thank you. >> i wonder if you could talk, you had the experience like some
people earlier, of being both an academic and policymaker. do you think this whole framework thing is as important as the speakers on the previous policy suggested? >> i'd say a very clear yes, the fair market is incredibly important. i can say that based on my experience to set monetary policy. not just important for the policymakers sitting in the seats, important for discipline for them but more important for accountability, transparency for the general public and overseeing you. first, as someone studying monetary policy, you're asked to comment on a lot of different things. at the bank of england we were dragged into debate on inequality and climate change and fiscal policy and brexit. there are lots of ways to comment on lots of issues. having a clear mandate, 2%
inflation target was a discipline for all of us, we will only comment if it relates to our goals on 2% inflation target. i think that was good for our goals. internally i thought it was very healthy what i would focus on. we would meet and debate and decide where the forecast is and which then determines what we do with rates. there's a lot of variables of people with different views and different takes. you can't argue the view on these forecasts. i found it helpful to say, okay, it's 2% target. instead of x and y. i usually go through that list, here is a list of eight things i don't think are important. i won't worry about those, instead focus my discussion on
the points on things that matter. bottom line having a disciplined framework internally and how you talk externally. most important is maintaining credibility of central banks. right now, central banks have a tremendous amount of power, influencing people's lives we're not aware of as in the peace and have a big public world. they have to explain how public officials carry out those you'll roles and justify actions they take. going forward more central banks will probably be raising rates and people take out a mortgage and realize it will suddenly cost more. banks have to explain why they're raising rates and make it harder to get a mortgage. you need the framework why you're doing what you're doing. they seem understandable, easy
to us, nominal gdp targeting, things like that. ex a spring to it the public i worry is incredibly difficult. explaining it to the public. they were off by 2, 3 percentage points today, even what seem very simple ideas getting them out to the public is hard. the other issue framework is important is relevant today. we're averaging what happened in the past a couple years and you're justifying behavior, especially in the past. when you go out and explain to the public why you're doing what you're doing, they don't care what happened. be based on what you think is happening today or planning in the immediate short term future. for all those reasons framework is very important but very easy to explain and understand and
very relevant to people's lives today, not intangible in the distant past or future. >> when you were at the bank of england, was there any consideration whether having an inflation target was a good framework, whether there out to be an alternative. the bank of england has been able to achieve its inflation target. i suppose we could deflate our currency by 25% and drive that as well. does this issue seem strange to you from the point of bank of england? >> there was a debate before i started, governor carney started there should be a change. there was no debate. 2% inflation target was a very good focused discipline for all of us. we were also told when we started the government sets the inflation target, not us, don't comment on it inflation tart no us. some of the discussion we have
had suggests that having a strict inflation target is constraining in some way. doesn't let you do the optimal monetary you would do to reduce welfare. in the uk hassen even stricter target than the u.s. 2% inflation that's it. no out put gap. it's just the inflation target. my sense being there we had a tremendous amount of flexibility. we could look through price shock. whether it's medium term shocks such as exchange rate move. didn't effect inflation for three or four years. we could look through that. we could when there were large out president gaps we talk about that. as part of the inflation frame work. we usually brought it in in a way that our goal is meet the 2% inflation target sustain bli. that meant even if the there was an out put gap we would not sustain inflation around 2%.
more recently there was more discussion about the speed with which you return ip flags to 2% and the cost of that. in sense we had a strict mandate. 2% inflation that's it. we could work in the other considerations that other frame works seem to be bring in more formally. i'm not entirely convinced we need to bring it in formally. >> does anybody in the market care about what frame work they pick. price lev, 2% inflation target? turn on your mike. they don't know whether you care or not. >> let me start by giving a disclaimer. what i say doesn't fesly reflect the view of the entire market. certainly there's quite a bit of interest. i won't say there we put it quite at the level of importance as inside central banks at this
point. yes, there's interest. the possibility of something happening here is i think people looking to the likely hood we see a substantial increase in uncertainty. if it went to the level of a raising an inflation target substantially to 3, 4%. that would obviously open up the fed federal reserve act. that's no longer price stability. and that would i think raise quite a bit of question as well. certainly anything any move in that direction you're raising you are raising inflation expectation. but over time very slowly. people tuned into the possibility. and the inflation risk premium. i think the inflation the notion of a shift in the inflation target up toward 3, 4%.
kind of agree it's not likely. people are generally discounting that would be my sense. it's the view in the market is currently if the fed changes their target they should change it to something achievable. like 1.5%. which is where it's been. there was a question raised which is a serious one. people in the market generally don't believe there's a groove. or at least the view that inflation is always and everywhere a monetary fe no, ma'am -- holding inflation low. everyone nice work at the san francisco fed suggesting the element of the economy is growing. as it now more than 50%. and tending to hold inflation down. there's a real challenge getting inflation back maybe even to 2%
let alone 3, 4%. so the notion of inflation target increase just isn't there. if i can talk about the alternative. the one that seems to be coming through is the average inflation target. or price level target. here you're dealing with something that would folks on the market recognize increase volatility. certainly to hit an inflation price level of over time you'll have shocks to the downside. that will have to be offset to shocks to the upside. more variance in inflation and more variance in out put. i would argue. let's take an example of what if we had adopted this has been been suggested when we hit the 0 bound. and find ourselves today as 5% below target. on inflation. what are we going to do for five
years? are we going to raise the rate immediately to 3% and have it stay there. maybe that raises expectation chl inflation expectations adjust slowly. they are adaptive. and it will take time to get there. let's say we get there. how does the fed achieve that. by driving the unemployment rate i think significantly lower. it's already below. maybe we go down into the midthrees maybe lower. i'd like to go back to the 1960s. the last time we had an occurrence like we are now. we went through the 50s with 2%. the 60s 1.5%. the unemployment rate went down below. about 2% below. with no movement in inflation
buena vis. in 66 it jumps by 2, 2.5 percentage points in one year. going into the great inflation. i think the there is a fair amount of work suggesting there are non-linearties in the phillips curve. what's going to keep this from over shooting. >> so we could relive the 60s. i do sometimes think everybody in monetary policy is fighting the last war. different people are fighting different last wars. we have been -- you don't steam to agree with larry and the ohs that we have an urgent problem here. we're likely to hit the next recession unable to use monetary policy sufficiently to get us out. the risk of hitting the 0 lower
bound is large u uncomfortably large. the natural rate has come down. and the risks of being not reliving the 60s but the last five years are worthying about. >> okay i'll observe that the fed has never been able to get the unemployment rate up from significantly below nay rue. without a recession ensuing. the record in achieving soft landings here is pretty remote. question is how does this lack of ammunition create significant risk going into the next recession? my view on this is the cost are pretty significant. we need to have a better handle on what the cost of higher inflation maybe. yes there are benefits obviously from the ammunition for policy standpoint. but the balance here is close. i would say rather than jumping
into something right away let's see how it goes in the next recession. and let's see how it goes in terms of getting us back to naru. on what is our ability to control things here. >> it seems to be like saying you have this massive heart attack and trying to decide whether they should do coronary by pass and the cardiologist says wait to have another heart attack before we decide. >> that analogy is not perfect. >> no -- but it was. im not as summer i can't come up with them like that. >> i take your point. let me gif you a chance. one of the interesting things about the conversation this morning. er once this a while congress would come into the picture. most notably there were some suggestions and people made this
a number of times that 4% inflation maybe hard to justify with price stability. and that's just in a legal sense. not political sense. no i know you have don thinking about what role does congress play in this. and how would you look at this discussion we have this morning. earlier this afternoon. from the eyes of the political reality of central bank in the united states. >> sure. so i think there's been good discussion economic cost earlier today. about either raising the target or alternative regimes. but with the exception of ben. no one has nailed down the political cost. here. i would argue politically congress has to buy in to either raising the target. let alone any other radical changes to how it goes about pursuing its mandate. i can the usual. >> pull the microphone. look at me.
make sure the mike is on my side. >> i usually it's good to anticipate. look keep in mind that's dan fisher distinction. that the congress gives the fed mandate. so the fed has goal dependence. and the fed has instrument or tool independence. why should we worry about any political cost. to put it bluntly the notion of independence for the fed we could call it a myth. three reasons here that will help us think about the political cost. first it's crystallized if the fed pushes too much into the policy of changing its target. we could easily see it risk losing half of the side of the mandate the employment side in the first place. second even without legislative action, it's not at all clear on
this sort of goal vs. instrument distinction. it's not clear where the inflation target or any targeting where it fits. is the target a goal? is it an inherent part of the feds price stability mandate. thus changing it is congress prerogative. is it a tool for achieving price stability? congress also sets tools. 13.3. interest and so forth. so conceptionally. there's little expectation for making changes to the target. third, more important will set aside the conception issues think about the current target. as we know from his memoir and the transcripts he worked for a decade to convince his colleagues on the and also his congressional bosses on the hill. that the fed should have an inflation target.
we hear the constraints for those of us not around the table. but dependent on the transcripts. 2008 quote having the inflation target won't have any effect if it's reputeuated by the congress. 120 around the table. one of the main issues has been whether we can succeed politically in creating a target or whether there would be quote push back from congress. of course there was push back from congress. when he went to the hill in 2009 barnny frank house of the financial services committee said this will be a particularly bad time at the height of the recession to adopt a target for just one side of the feds dowel mandate. think about it that was 2009. it took until january 2012. it took the fed three more years. >> they were busy. >> in any theory of instrument independence. they might have most needed it. we might have expected it. perhaps to move more quickly.
what's critical here is six years later, lawmakers they're still threatening the fed about the target. not from the left this time. from the right. we have the. >> go ahead. >> let's assuming this goes -- this is the out going chair during financial services committee. this is during the last july report. the hearing. >> in a recent press conference some interpreted comments that you made to indicate that you were open to an increase in the inflation target. are you pursuing an increase in the inflation target or other
members of the fonc is this a matter of discussion to increase the 2% inflation target? >> it is not. we reaffirmed the 2% inflation target in january. we are very focussed on trying to achieve our 2% inflation target. and it is now the subject of discussion. >> thank you i will take no for an answer. >> that crystallizes it here. i will take no for an answer. >> having looking over my shoulder is not. >> just to think about it. will jay pal be treated differently than janet was. it remains to be seen. or part of it depends on whether the criticism from the hill was purely ideology. in terms of economic views. or part of the partisan.
because it was a democratic -- >> so if the fed decided it wanted to move it a price level target, is it your view that they would need kind of the at least consent in an informal sense of the members of koj before they did that. >> that's my interpretation. judging from not just inflation target. but other soepds when the fed looks for particular tools or changes. the challenge here is the history dependence that she mentioned. if there's catch up behavior. what lawmakers care is the state of the economy and whether they will be blamed for things going poorly. they won't be wild about numbers of inflation rising on their watch. >> so what would you do? would you give up on this talk
of frame work and try to pursue the taylor rule? is there attractiveness to price level or nominal gop targeting-over some variant. >> the taylor rule is a frame work. policy rules are a frame work. for thinking about the sdis decisions of policy making. it's detailed than just the inflation target. it's part of it but not the whole story. i wouldn't give up on it at all. if you talk about congress there's a bill which i think would require the fed to say what it's doing. on its policy. in fact if the fed came with a rule of some kind which was price level targeting what makes you think it would be rejected? they would like you to elect the fed to say what the fed is doing. i'm sure there would be lots of discussion.
why would you just say they're going to ignore it. i think that's the way to think about things now. the instrument independence versus goal independence the congress would like the fed to describe its decisions on the instrument. doesn't take any independence away. the fed to describe what they are. if it is along the lines that john williams said, it's hard to see why it would scratch it. there's a better way to go about this. which actually goes back to early work of john williams. which is it you don't have to change the inflation target. you commit to when the interest rate hits zero to keep it at zero longer. it's a beautiful way to think about this. instrument. it's a met rule. and that's one of the things i would do going forward: here's what we're doing and here's why it worked.
i don't think you have to go through the inflation targeting change to achieve that. it is very close or much closer to what the congress is asking the fed to do. >> so peter, do you think the market -- i won't ask you to spiel for the market. do you worry about that the our star the long run rate is low and we might find ourselves in the position of having a recession that's hard to fight both because of monetary policy out of ammunition and fiscal policy is paralyzed by political gridlock or debt to gop? or is that a fairy tale that we shouldn't worry about. >> it's something to worry about. no question. the question is what to do about it. >> right. what would you do about it?
>> for now i would stick with the policy we have. but recognize it does give you rom for flexibility on the upside. allowing inflation to over shoot into the 2.5, 3% range. giving you ammunition when the time comes would be wise. >> do you think the markets think the fed is willing to led inflation over shoot the 2% level right now? >> no. roigt now the market is having a hard time getting its head around idea it will get to 2%. the tips break even longer dated five year expectation is about a half percent less than the feds 2% target. if you adjust cpi to pce. so yes i think it's getting there would be. >> why wouldn't the people in
the market be screaming the fed is making a mistake by raising interest rates? if we're not hitting the target. the markets don't think they can hit the target. so wouldn't it follow we shouldn't raise interest rates. >> there are certainly our people in the market who are saying that will occur. the market expectation is substantially less still than the average. >> john. >> let me interrupt you. the fact the inflation rate is somewhat below the target doesn't mean the interest rate should be 0. it could be a little higher or 1. it could be two. this notion i think one of the other problems i worry about the inflation target. it seems to be if it's 1.5 or 1.63. oh my god we have to put our foot on the floor. that's not how monetary policy should work. interest rate maybe should be lower. it should be lower than otherwise.
but not complete full throttle. >> you should allow the inflation rate to rise above target. which the current system allows you. i don't see the need to put yourself in the into pa tighter straight jacket at having to achieve a certain average over a certain period of time. which is more difficult. >> i'll ask a question. don't feel you have -- does the rest of the world. put down your international economist hat for a moment. duds the rest of the world care about the conversation we had here earlier about how the fed is choosing to define price stability under its mandate. >> i would say yes. to different degrees in different countries. the fed is a leader. is sets examples for the world. it's highly respected. for example the fed the fact they're cutting back on qe. the bank of england was excited.
to get a sense of what will happen when we follow that path. the u.s. is a role model. i want to take your advantage of your suggestion to jump on anything. three points were raised earlier. first peter you said expectations tend to change very slowly. inflation expectations are very slow to change. my experience is that is not always the case. in the uk inflation expectations were quite low. around 2015 after the oil price shock and inflation hit 0. and negative. so inflation expectations were low. then we got a brexit shock. and inflation expectations popped up high. and now they're higher than some people might be comfortable. historic averages. we saw inflation changes quickly. i'm not suggesting a brexit shock. but it shows how quickly people
can change when the situation changes. another question david which you asked. how big a risk is the 0 bound. i cam here for all people who have spoken today people came here with priors on what the optimal frame work is or where we should go. i came without a prior. i came to learn and hear the arguments and listen to the cases and try to form my opinion. what hit me is most all of the cases this morning started with the argument we need to change the frame work because of constraints around the 0 lower bound and. we aren't going to have the room to operate in the future that we would like to have when the next bad thing happens. i largely adwree with that. especially in terms of theoretical model. if you believe it's a constraint. this holds and there are big welfare gains from changing the frame work. i don't know if summers are quite as accurate. in practice, where i wonder if the argument is quite so strong.
is how tight a constraint is the 0 lower bound. when i start my own e peerns when i started in the uk i was worried about the 0 lower bound. that made me more cautious starting a tightening cycle knowing we were so close. and could be another negative shock. then we hit the brexit shock. interest rates were at.5. we weren't quite at the 0 lower bound. the estimate is rates could go a touch below 25 basis points. not much lower due to the structure of the finance society. so we were pretty much at the effective lower bound for the uk. in response to brexit the committee decided to do a package that was lowering interest packages 25 basis points and doing qe. starting a new corporate bond purchase program and lending program to make it easier for banks to pass on lower interest
rates. we did estimates of what impact that should have on the economy. we had a skeptical view of how effective the small packages of corporate bond purchases would work. not sure of how much this would work. we saw this package worked quite well. it was more effective than estimates. i became convinced that asset purchase programs can be quite effective in helping alleviate constraint around the lower bound. they stimulated the economy more than expected and it wasn't because financial markets weren't functioning. that was not the case. so i guess the bottom line is i'm less convinced that being near the 0 lower bond is such a tight constraint. we a new set of tools.
but if we are in the situation with the 0 lower bond again we have options. we shouldn't -- i don't feel as big an urge to change the frame work with potential cost because of that constraint. the final point i want to make it hasn't come up as much as i expected. despite david one of your mandates to everyone was to discuss how their policy would function in doing all stages of the economic cycle. most of the discussion focussed on this stage of the economic cycle when inflation it too low. we went through that and quickly another shock. and inflation is too high. it's 3.1%. when the committee not me anymore is in the position of having to write to explain why inflation is too high. we have been in a very unusual state of the global economy. we had the financial recovery. and just as things started to normalize. we got the commodity shock.
we are it's not surprising we're focussed on the situation when inflation is too low. we forgot there's a whole other set of shocks that could hit. we need to make sure if we make a change any frame work will function well in that environment as well. >> i substantiatand corrected. inflation expectations are sensitive to oil shocks etc. less so in larger less open economy. and over longer dated periods. i do think that the key question here is what effect do central bank announcements have on inflation expectation. bank of japan had trouble with that one. and i suspect that the fed announcement that we'll go to 4% if unless inflation had already risen to near that level. could be a problem. and announcing something when
you're well below it and failing to get there could be devastating to credibility. >> so your question about international. i think is very important. and for the last few years there's been a tendency for central banks to follow each other. it's quite clear the examples i give is japan followed the u.s. in because the was too strong. and the follows israel because the euro is too strong. both actions change the currency dramatically. and countries all over the world worry about exchange rate behavior because of the policy. this is a global phenomenon. i have a great concern about the exchange rate. effects. many people feel we need to have a more rules based international system. that is not a view of a few people. i think the best way to get to rules based international
monetary financial system is for the individual countries to follow that kind of policy. inflation targeting the 2% inflation target has effectively become global. it's what the europeans talk about what the british talk about. what the japanese talk about. and of course we're talking about it. if kbloouf away from that from two to 4. you can upset that. and obviously currency issues come right away. even more modest changes of the price level targeting -- by the way my original work on policy rules fts price level targeting in ancient history. if anybody is interested. we changed that because it had some of the problems that people are referring to now. everyone a small adjustment like that threatening the problem the goal. of moving toward a more rules based international system. a lot of people want to do that.
there's an opportunity for it now. there's more and more evidence coming about the exchange rate volatility. capitol flow voltyty from the unusual policy. and europe is talking about moving back even japan is talking about moving back. that's a goal. i don't want to upset that goal by a change in the policy. very important to stick to what we're doing adds best we can. >> we have time for a few questions. >> peter here. and a woman over there. start with the woman in the back. >> one question i had is regarding the frame work of monetary policy. if i'm going forward there is more of a role for asset prices than just the credits transmission channel. if the transmission america niche change how should the frame work change.
with regard to implying that unconventional tools might be here to stay. can you address maybe how the frame work to change if the transmission mechanism changed. >> the discussion is i hear it reached a conclusion every single person is advocating either for the state status quo or chak change. acknowledges some shortcoming in the proposal. nobody is claiming universal benefits for the proposal. the situation tells me we exhausted the possibilities that there are. we have to choose between do we think something is more probable or less probable. what that suggests is we need to devote as much attention to thinking about an assumption which we share in the debate. which is the shocks are act ts of god. there is a shock. and to which how do we respond. we need a certain kind of
instrument. we have all taken the same assumption which is their acts of god. they're not acts of god. these are things which are produced by economic systems and economic policy. and i think we should be devoting at least as much attention to thinking about diagnosis of the problems that gives rise to the shocks. as we are to devoting our attention to policy frame when they happen. >> thank you. i think it would be unfair. there was discussion and disagreement about whether we had to accept the natural rate of interest had come down or whether we could do something about it. which seems part of the point you're trying to make. does anybody want to take the point on either question. >> i want to make explicit. the it's here to say. we had the play book and put it on the shelf and break the glass and take it out again. i don't want to make that
assumption. i could imagine first of all we know parts of it have been tinkered with. it would be harder to use in the targeted fashion it was used in 2008. and late 2007. i won't guarantee the fed the congress might weigh in on asset purchases on the size of the balance speet. on paying interest on excess reserve. which wasn't immediately part of the play book. one could imagine that the set of tools that had the first time around assuming it's a similar tape of crisis might not be on the shelf or take them off the shelf. and keep in mind also probably assumes there's a massive tarp but i wouldn't necessarily bank on another wall street bail out. looking like the one it looked like back in 2008. >> okay.
>> these two questions are somewhat related. there's the shocks are coming from somewhere else. and i agree that studying the best way to react to the shocks is a big question. it will be more coming. the asset markets. what i think is we also have to emphasize and sorry to bring it up, some shocks are caused by monetary policy. i happen to argue that big changes in policy came because the shocks diminished. i have argued that this terrible tragic great recession we went through had a lot to do with monetary shock. those are part of the discussion. that's why we want to have more stable monetary policies and there's various ways to go about it. don't forget that powerful aspect of monetary policy which can be damaging if it's not done right. >> did you want to respond. >> first question on has the role for asset prices in the trance mission mechanism.
asset prices are front and center in central bank models. not because central bankers want to effect the market. more you know changes in monetary policy will effect asset market and those changes will then effect consumer wealth and spending. and effect the economy. that is built in there. the transmission may have changed. there's also a lot of other things that changed in the economy. so there were modelling we did of how we weren't sure given interest rates had been near 0 for so long. what would be the effect of the first change. at loes the best you can estimate with the usual huge number of caveats there hasn't been a huge change in how the mechanisms worked. there has been other changes in the economy. this is one another point i don't think got enough attention
earlier today. we don't know where our start is. i was struck when you showed the graph. you showed steady down toward trend and plummets. then it falls gradually. and you said the main factor driving this is demographics. which are largely still moving. i had this argument once. so if most of the factors are slow moving. why was the strap off the cliff. we don't know. there's a lot of uncertainty. another uncertainty is more and more monetary policy seems to be working through changes in ek change rates. especially smaller economies. the euro area and japan. so there's a lot of structural changes that happened. we don't know where things are going to normalize and settle. any consideration of changes in the frame work are particularly
hard. given it's hard to know where normal is. that again makes me cautious. making any changes until we're comfortable with where the big structural settles. you commented that you heard suggestions and everything had pros and cons. i challenge you to find any economic policy ever discussed that doesn't have pros and cons. i thought there was something healthy about the debate. most people were candid and not pushing one side of the argument. we heard both sides. that's what makes economics interesting. there's cost and benefit. and you have to weigh them. >> one quick observation on qe. i can't imagine if the economy is going into a significant recession jobs are being lost and markets are crashing. congress can't get its act together with fiscal support that they wouldn't allow the fed to yous a tool that has proven to be effective in the past.
so that i can't see taking that off the table. >> mortgage backed securities. can they buy any asset? i don't know. it would be prudent given the rather pretty tough criticism that came from the far right on the hill. about whether the fed had strayed or how far it strayed into credit policy or fiscal policy by buying housing mortgages in essence. i as a thinking about the future recession knowing past criticism. i would wonder how broader range of the play book would be available. >> i think we're our shop hasn't called it officially. we could see a recession in 2020. i can't imagine the current administration sitting on the wayside. and allowing conservatives in congress to call the shots here. >> not sure which is more heroic. prekicking recession or
predicting congressional reaction to it. please join me in thanking the panel. and then we'll move to the next segment. which is really important. because it seems to me that there's a question not only about what we sdhouhould do. but how we should get there. we may have something to learn from the canadian experience. i want to introduce john david murray. who was for 32 years at the bank of canada. 32 or 34? 34 years at the wang of canada. the last four as deputy governor. retired three years ago and an academic and board member. he's going to talk about how the bank of canada has come to have a much more organized process. about reviewing the the frame work. and eric rosen again the
president of the federal reserve bank of boston. will respond. john. >> is this on? thank you. there should be a power point that accompanies this. not that one. >> click it forward. >> oh. there. you can see i proposed to talk about and central bankers in the room this will make them app plektic. partnering with the government. it relates to davids introduction. the special way that we partner with the government. in canada. and perhaps i relay somewhat ewe neck and specific to canada. but i think you'll find it interesting and beyond that i also think that there are more general lessons here. so don't want to over sell it.
first thing i'd like to say is in fact standing things on their head a little, when inflation targeting came to canada it was actually the government that proposed it. not the bank of canada. now you might say why would they do that? and three quick reasons. come to mind. one of them the most positive perhaps is a they thought it was a good idea. and thought the reserve bank of new zealand provided an interesting lead. some encouragement. number two, is that the government was in the process of introducing a new goods and services tax. which was going to boost the headline inflation rate. quite significantly. this coincided with a situation where unfortunately they had to negotiate labor contracts with almost all the unions in the
federal government. so you can think of them wanting an inflation target as some kind of assurance. some kind of buffer. to see them through this difficult period. and the third is sort of a preemptive act. the bank of canada started on a very sort of aggressive determined track and was out there talking about the virtues of price stability. which i know isn't anything new for a central bank. this was in a direct. and the determined way. and although no numeric target was given for an end point on this, when asked, by a journalist, what this might mean. the answer was for inflation four is not as good as three. three is not as good as two. and two is not as good as one.
one is not add good as 0. don't want to put words in his mouth. we were talking about price stability. you can think about this as a preemptive act on the part of the government. in the their view things didn't go too far. what was the banks reaction to this proposal? it was mixed. it was positive. they were very receptive to the idea of inflation target. they were less inthuz yastic about the way the government wanted to go about it. they wanted to aim for a relatively high rate. not high but by that time. but say 3%. and were thinking of something sort of short term. i'll call it a patch through the difficult period. the banks reaction to this was it had to be meaningful and long term. it had been to be serious. and in the event perhaps a little surprising for some.
the bank of canada view prevailed. and what we got in the end by way of the very first announcement in 1991, was an inflation target of 3% for 1992. going down to 2% of 1995. and there was a 1% to either side of the targets. what's perhaps most interesting is that this was regarded as a beginning. that after 1995, five years hence. based on experience this issue would be revisited. but with a strong presumption a gain that 2% was only an entresing start. and you were going lower. the first renewal of the agreement the bank had with the government in other words 1995 was to review the experience.
but it was related to that thought of in terms of the one and done. after five years experience surely it will have enough information that will be able to peg the rate. the optimal level of inflation for us and that's it. this was not seen as the beginning of an ongoing process of renewal. key aspects of the agreement were this was simply a joint press release by the bank and the government. and it came out as part of the government february 1991 budget. there is no supporting legislation for this. indeed that's the pattern through time. it's public. and that extent has some force. but it is agreement between parties. it's a partnership. with one admittedly for equal than the other.
ultimately. the government of can ta for a long time it's been clear in the legislation, has the power to issue a directive. to the barng bank of canada. if it's unhappy about monetary policy it can tell them what to do. this came about in 1967 as a result of the events that i goent into. i won't go into. there are three conditions around that ability. they have to be specific about what they don't like. two, they have to be very specific about what they want the bank of canada to do. and three it has to be published. and there's always a presumption if it was ever used the governor at the time would feel compelled to resign. perhaps as a result of that it's never been used. this nuclear option. what it means is having that in place is good in two ways in our view. that it does give ultimate responsibility for monetary policy to the government.
but it ensures they can't use it too lightly. and effectively then gives the bank of canada considerable operational independence. instrument independence. i'll speak to this later hopefully quickly. we actually see the agreement instead of eroding that independence rather enhancing it. one you have the government to sign on, the scope for them to criticize is as long as you're doing your job becomes more limited. so we see tremendous advantage in this public agreement. and i'll mention this renewal process that's developed where it's refreshed every five years. i have talk about the early ambitions regarding price stability. the origin of the process. let's see have i got this right.
to give you a flavor of where this was headed initially. the first bullet doesn't complete all of it. it lays out the specific targets. i think the last two bullets are more interesting for you. there after, after 1995. the objective would be further reduction in inflation until price stability is achieved. the last one, based on a will the of work the bank of can did had done in advance is a good deal of work is already been done for canada. this work suggests a rate of increase that is clearly below 2%. and you might ask where did that come from? well it came from a will the of research. but the 3 reasons for having an inflation rate above 0 at the time for us we're not regarded as that material. we had a measurement bias in the cpi. but it was judged to be very low. presently probably and then half
a percent or less now. that's not a reason to have a 2% target. we could find some statistics support for the notion of nominal wage. but our work suggests economically it was not very important or meaningful. and because of the great moderation perhaps we under estimate the significant of the effect of lower bound. that was something that we thought if it did occur surely there would be means to over come. that's where we were coming from at the time. in the event the target was renewed with the government in 1993, i won't go through why. since been renewed in 1998, 201, 2006, 2011, 2016. it's up for renewal in 2021. referred to earlier despite all the renewals there's been no
material change. the 2% has been maintained at the midpoint. and the language arpd it quietly changed. instead of talking about price stability so often we talk about low stable and repredictable inflation as being the good thing. one of the reasons perhaps the post important reason. the 2% target han changed. is that the economy seemed to perform so well. better than expected. under the 2% inflation target. that set a rather high bar. for doing anything adventurous. especially you'll note the dates for some of the renewals coincided. with episodes in which the economy the situation was particularly uncertain. 2001. right after the tech level. 2011 well into the followed.
from the great recession. but just to give you a flavor, for how much things changed on the inflation front. looking good. we did so well that the imf and others accused us of covertly price level targeting. and you can see why looking at this graph that might a reasonable suspicion. the black line shows you a hypothetical price level. that is allowed to grow at 2% a year. and up until about 2012, 2014 even. we're doing remarkably good job. this came as a surprise to us. no not the good part. the good performance. but when the imf pointed this out and accused us of covertly price targeting. which is odd. the major benefit is advertise
it. so you can condition expectation. as we reflected on it, two things. people referred to luck earlier. and perhaps a sequence of shocks. that happened to be offsetting or symmetric. another thing that's mentioned and we learn to appreciate its importance even more is our reaction function. which like many central bapgs put a very large interest rate smoothing. if you think about that, that already introduces quite a bit of history dependence and you are inflation averaging unwittingly. you might as well take credit for it. quickly the advantages o of a regular renewal process. what's the point if you don't change? but there's a lot going on underneath. is what i'll maintain. the first we believe this is a critical part of our accountability.
this is a critical element of our responsibility to canadians to ensure on a regular basis we are working under the best possible frame work. for them. second it's a way of diffusing potential problems. by that i mean if this is a once in a life type event they're going renew the target and things might change. there's excitement around it. if there's irregularity to it. this is business as usual. you diffuse a lot of that. we're taking care of business for you. next, it promotes -- deliberate and transparent mechanism to engage stake holders and get feed back. this is important. transparency in particular. when the bank of can did renews the agreement with the government this isn't the product of some sort of secret discussion between the two.
this is something that is initiated quite early on. and the bank of canada is very careful to lay out the issues it proposes to address. the changes that it might consider and to invite feed back from the public. from the government of course. from academics. and it's the beginning of a sequence of often conferences. as part of this process. so the transparency to our mind is very important in terps of credibility and buy in. that's a way of promoting public awareness and understanding. a driver. she mentioned this. a driver for more focussed research effort within the bank. and something new has actually been learned on every occasion. it's not as though we find it isn't deepening our understanding of the economy or monetary process. nothing changed.
but things are going on underneath. possible disadvantages, some argued that by renewing every five years perhaps you're not going to anchor inflation expectation if the market thinks every five years there's a possibility you'll change. inflation expectation might not be well anchored. there's increase scope for. this has been the topic of a will the of people. today. that's true. there's a risk. could say a waste of time and energy. if nothing changes in the end. what's the point? then related to that trying the publics patience. announcement fatigue. we're going to renew. 2%. did i mention that? counter arguments. there's absolutely no evidence from canada very little of fragile or unanchored inflation kppation as a result.
it's a mechanism for enhancing. and important confirmation of the frame work soundness. even if nothing changes. the fact that you are confirming that in your view we are where we should be. is important. inflation expectations that's a to show you this is based on two and three year inflation expectation. you get a little movement. they're remarkably stable. for that term. one to three years. near the end. quickly, what are some of the issue the bank of canada examined in the last 27 years? i divide them into two categories. fundamental and housekeeping. or operational. fundamental which we have always looked at should the inflation target be lowered? that occupied everything right through to the 2011 agreement.
it's only in 2016 that the question was turned and should we raise the inflation target. in the end we didn't. and i can explain why. maybe i'll do it now. quickly. there had been this predisposition toward lower is better. starting at the beginning. and this had sort of reseeded. a little. but there's always a sense that lower inflation something close to price stability would be better. and price level targeting held a will the of attraction for some of us. as a way of achieving a lower inflation rate. while dealing with the effective lower bound. if price level targeting works, it actually reduces the swings in inflation. and out put and interest rate. you need much less by way of
interest rate movement to stabilize the real economy and inflation. the key is communication and credibility. people have to know what you want to do. and believe you're going to do it. not a big if. would price level targeting be better. a will the of us thought that's good. interesting. how much recognition to give to financial stability considerations. leaning. do you want to modify your reaction function and give that recognition your frame work. we asked that as part of the 2016 thing. and the answer was probably not much. that we had already gone on record in 2006 speaking about leaning and potential advantages. we refreshed that in 2011. and addressed it again in 2016. 2016 we stepped back a little. where as in 2011 we said it
could be a forth loin of defense. if supervisors and regulators weren't doing their job that's too bad. if macro tools didn't appear to work. if investors weren't being profited enough. shame on them. or institutions. as a fourth line of defense. if you had to. by the time we got to 2016 we had been influenced by the work that shows there might be a negative benefit that to leaning. you do more damage than good. so don't -- the bank didn't kwoit run away from that. it was easing back. operational housekeeping matters. cpi the best index still. that's the one we target. we inflation, that's changed a little through
time. how important is measurement bias, and we confirm every time it is bigger indeed because of changes that have been made by statistics canada, it's a little smaller. it wasn't big to start with and it's smaller now. looking ahead, this is my last slide. next renewal set for 2021. bank of canada. mapping out a research agenda for the next five years. the final questions have not been determined yet or else they'd be advertised. but they intend to take broader sweep this time. instead of looking at the objectives or the framework per se, but to also look at tools in more detail and communication. old issues will almost certainly be revisited. other new initiatives will no doubt be added. here in terms of the fundamental issues, while we've done a lot -- i've retired, i shouldn't say we. while the bank of canada has done a lot of work on lowering
inflation, its advantages or costs, price level targeting, while we talked about it and did some work, we didn't talk about nominal gdp targeting. and i think that is going to be revisited. in level form as opposed to growth rate. i can't be sure. this isn't based on information -- or inflation averaging or instead of, we already inflation average, we just happened to pick a 12-month period for that. what that did two years or three years or like australia, over the cycle, and as i mentioned earlier we already do it kind of. with our interest rate smoothing and the reaction function. so that's some of what will be looked at. but the main takeaway i want to give you is that the bank of canada really values this renewal process. and it doesn't become sort of a dogfight between the central
bank and the government, maybe that's an unusual situation. now you may argue -- you may argue that you can't take much comfort from that, because we've never proposed a major change, why would the government sort of be nasty or push back? and that's a fair argument. but turning it on its head a little, i can say from my experience, i am not aware of the government ever pushing us to do something or to change something. like wouldn't a little higher inflation be nice for everyone? so the fact that that question was raised in 2016 and examined isn't at the behest of the government or anything, you know, take it easy. no. very much the bank has been carrying the load on the propos proposedals, the proposed changes, and the research.
bringing the government in at the end. it is a partnership, and obviously 97 fithey have final,l say to a degree. there's been a lot going on. i'll end with this. what did i mean by a lot going on underneath? although we didn't change anything major. you can see where we started. there was a strong presumption that we were going lower. we had research to support it. 2% was nowhere near price stability, and price stability would be of tremendous benefit to the economy. because measurement errors is a problem, nominal wages doesn't matter, the effective bound doesn't matter. the first two really haven't changed materially. the third one clearly, based on experience, has gained more importance. but where i think we come out in the end is that the painful
experience -- i shouldn't call it painful. the experience with the great recession, unconventional monetary policy, which we still believe works effectively, you just have to try harder. sort of gave us a slight -- a different view on the importance of the effective lower bound. but i think bank of canada just reached a point where it made it happier at 2% as opposed to revising its view about how high it needed to go. field the unconventional tools. the feel that unconventional tools are effective. the feel that fiscal policy could play more of a part in desperate situations, hopefully, so you're not on your own. it doesn't become a headwind for you instead of a tail wind for you. a number of things. also this view this judgment that it's a little early to call a big change in the neutral rate.
and i like the point that was made based on john williams craft, that sure it's been going down, people are in the habit of saying it's been going down 25, 30 years. maybe a little because of demographics but it didn't fall off a cliff because of those. to sort of take that as your base, it's a random walk from there, i don't know. that seems a little presumptive. so anyway, i'll stop. >> thank you. so now we're going to turn to eric rosengren who i'm sure will say something that was said earlier at a lunch we had, maybe all that's different is the canadians are nicer so they can do this. >> thank you very much. let me put john's nice presentation in the context of this conference. so this conference started by larry summers talking about the fact that very low interest rates for a long time were both quite likely and quite costly. the second panel then talked
about where the possible solutions, giving a number of different frameworks that would make that less likely or less costly. the third panel put together a group of stakeholders and talked about more broadly how the various stakeholders should care about this issue. and this final panel is really to talk about process. so i am going to talk about process in this panel rather than necessarily go into details about the various proposals that have already been discussed. so we heard what bank of canada did, and i think it was a very clear presentation, so thank you very much for that. i want to put that in a context of how applicable is there to the united states? there are a lot of differences between united states and canada. we start with a very different framework. we do have a dual mandate. it's maximum sustainable employment and stable prices. we've explicitly defined the price part of that to be a 2% piece, total pce inflation.
the maximum employment, we didn't provide a numerical target because it was viewed that the natural rate moved around. finally, how do we deal with the fact that we're missing on both those two elements of the mandate? we take a balanced approach. don cohen highlighted we don't talk enough about this and i agree, that the balanced approach i think is quite important. that we give equal weights to deviations from both targets and that's how -- this is the operating procedure we should be using. each january the committee reaffirms the framework. so we have the potential every january to make changes. to date those have been relatively modest. there have been, at least in terms of the overall framework, it's been pretty consistent over time. the main change was to emphasize the fact that we have a symmetric inflation target. there's no mechanism equivalent to what the bank of canada does in terms of a five-year review, particularly in the context of having a much broader public discussion. so we do have a private
discussion at these january meetings. it's a relatively small part of the overall part of the meeting. we certainly don't have an entire research agenda over a five-year period and we don't have the extensive public comment that the bank of canada goes through. so first the congressional mandate that we have hasn't changed. so why should we think about a framework that changes when our dual mandate doesn't? i think there are a couple of reasons for why we should think about that. we started with inflation target around 2% because it was viewed that it was probably likely to be in the neighborhood of optimal. and there was a lot of work done, both in united states and abroad. and most central banks have picked a target that's very close to 2%. i would say that that research was broadly done at a time where we didn't think we were going to hit the zero lower bound very often. and we didn't think it was going to be very hard to get off that zero lower bound. so what's new about thinking about it at this juncture is
that we have been through this period of extended low interest rates, not only in the united states but in europe and in japan as well. we also have different characteristics now than we were having going into the great recession. we have very slow productivity growth. we have very slow population growth. aiming demographics. all those would tell us that it's quite likely that we're going to have relatively low real interest rates as long as those conditions hold. so in fact while in our initial framework we've kind of thought about inflation being constant at 2%, you could argue that the optimal rate of inflation if you think you're going to hit the lower bound, depending on what's happening with population, demographics, and productivity, that the optimal level of inflation shouldn't necessarily be constant. it should be actually moving around so it's not just the employment part of the mandate that might change over time, it may be that the inflation part of the mandate would change over time. the second reason for thinking about it at this juncture is
that we've fallen short of our inflation target. so we've been almost every major developed country around the world has missed on their inflation target through much of the last ten years. undershooting inflation has occurred not because we haven't tried to get inflation back up to 2%, there have been very aggressive actions taken both in the united states and at major central banks around the world to try to alter that. we've had quantitative easing, we've used a number of other tools that we hadn't historically used. despite best efforts we haven't been able to hit the 2% inflation target. i would say, like john, that i do expect over the next couple of years, we will. but nonetheless, we do have this period of missing for quite an extended period of time. the third factor we have to think about is fiscal policy. so fiscal policy, rising gebt to gdp, gives us less of a buffer. just like we might have less of a buffer on monetary policy. the boat attention of
nontraditional policy, we've heard different opinions today. there's disagreement about exactly how effective those nontraditional policies are. but i think what's clear that is we didn't get back to full employment and 2% inflation target as quickly as some people had hoped. the tradeoffs between the goals and the optimal level of the goals may be different over time. maybe the f one c should be talking about that in a different way. i do think a federal reserve-led assessment that thinks about getting a variety of sources to provide us input actually does make a lot of sense. i think it is opportunity to actually think about whether economic fundamentals have changed in a significant way. equilibrium interest rate is the one most of the expectationers today highlighted. we this think about what are the best ways to sure we're satisfying the congressional mandate? if economic fundamentals are
changing we should factor that in to say, are we really meeting the mandate with a framework that opt male tries to address the guidance that congress has given us? so it would be good to have a more standard way to think about whether the framework should change over time. the bank of canada experience highlights that you don't have to change it very often. in fact, they've made very few changes. but thinking periodically about the cost and benefits, including the cost of transitioning, which chairman bernanke did talk about quite a bit. and also then what are the longer-run implications? longer-run implications would include how likely is it that we'd be hitting the zero lower bound for extended periods of time. so what would we reassess? i think it's basically the second panel. there were a number of different proposals that were laid out. so having a more concrete discussion, including getting input from people outside the federal reserve, as well as people inside the federal reserve.
we could think about whether the optimal inflation rate does change over time. and actually, i would argue that we should be thinking more in terms of an inflation range rather than a fixed inflation target. i'm not going to go to any length today because i don't have time but i will talk about it later this week. i think there are other ways to think about having a little more flexibility than what we currently have with our inflation target. the process should reflect the unique central bank features. so one of those features is obviously the political economy that was the topic of the previous panel, or at least part of the previous panel. i do think the politics are a little bit different in the united states than they are in canada. canada has a parliamentary system, we have a checks and balances system. that may mean that some of the lessons from canada may not translate perfectly. we'd need to focus on structural changes that could reduce the efficacy of the fed's policy framework. i really think this is important it didn't become a partisan exercise. this should be viewed as a
technical exercise. how do we best enforce the mandate congress has given us? not a question of whether we're re-evaluating the congressionally given mandate. while any kind of significant change should involve consultation with congress, and when we were thinking about the 2% inflation target there was consultation with congress at that time as well. so any change in our framework i think does require not only a broad discussion, but also a discussion with congress to make it clear that this is what we're thinking of doing. my own personal preference would be to conduct a full review like the bank of canada. i don't know whether five years is optimal. so i think we should give a little thought to having a certain frequency in which you have this discussion. however, i think it's also probably useful to have the possibility to call for an earlier review. if you pick longer periods of time. we certainly have learned things from the great recession. thinking that we would come up with the exact same policy now
that we would have in 2006, given all the things that have transpired over the last decade, tells me that there are maybe times where you think you should actually have more of a reflection, and that may not actually fit in particularly well with a five-year time frame or longer time frame, if that's what you picked. however, clearly i think it's an approach that there are a variety of permutations that the f1c could consider. i think the basic idea of a structured discussion where there's governance around, that you have to address these issues, actually is an attribute that i think has quite a bit of value. so my concluding observations, the bank of canada has a process, and as i've gotten older i've gotten a better appreciation for the fact that having these kind of processes and governance actually does matter. it does give you an opportunity to have discussions that you might not have otherwise. it also is a good way of communicating with the public more broadly about what you're doing, why you're doing it. and also having a clear communication with congress about what you're doing and why you're doing it.
so i think those are incredibly important aspects of central banking. in my open view the cost of hitting the effective lower bound for a prolonged period which cause us to at least have a reassessment and at least think about what the implications of that are. we might like the bank of canada choose not to do anything. but we certainly should be having those discussions. the great recession was a big enough event that we certainly should have a period where we reassess and say, hey, how do we make sure that we don't have those kind of events? we certainly did it on supervisory policy. there's no reason not to reflect back and ask on monetary policy, is there anything we should think about differently? having a process that can fully and more transparently examine the monetary policy framework i think would be a process improvement. so i think, john, thank you for the discussion, i think there's a lot of positive attributes. i think we probably would have to think about how that fit into the u.s. framework, both politically and monetary policy framework. but i think it nonetheless is an instructive lesson that we
should give some thought to. >> thank you very much. i'm going to ask a couple of questions and let the audience weigh in. john, can you just explain a little bit how does this work in practice? does the bank of canada come up with and publicize the research questions and run them by the government? or how does that get started? and then what happens over the five-year period? >> that's a good question, david. i tried to give some flavor for that in my presentation. i think it's the bank of canada that does the running. does the proposal. for questions to be asked, changes that might be reasonable. we do give the government a little heads-up before we come out with our list. just so they know. but there's nothing verbally surprising about that list. that it would be hard for the government to say no, we don't want you to think about any of
these things. they might resist, of course, us doing it. but that's different than researching it, asking the questions, trying to do the best thing possible. what has happened through time is i guess what we thought of initially as a one-off. one and done. then we'd know forever, quote what the rate should be. that actually continued for two or three renewals where we always thought, oh, the next one is going to tell us. another five years' experience. helping us test the waters, see what's happen, then we'll know. i'd say by about 2001, anyway, views change, done some things. but recognition was given at that point to, hey, there may be some benefit to this repeated exercise. and since then, it's something that we take quite seriously.
and it's something that we map out quite carefully, as i've indicated. it's not that we spend the whole five years looking at nothing but the inflation target renewal. but it provides a roadmap for our research and other people who we hope will bring us. >> and the questions are made public at the beginning? >> oh, yeah, yeah. and the discussion, the papers and all, are public? >> yep, there is a website that's set up. >> does anybody pay attention? i mean -- [ laughter ] >> i didn't mean that. usually i mean what i say but in this case i didn't. do you get attention from the press and the markets? or is it like jackson hole? >> well, it's not like jackson hole, we're canada. but we do have good economic reporters in canada. a set of them, admittedly not very large. but they watch what we do, what we say, have a i carefully.
the market is aware and follows that. i think as ben suggested, the public at large probably don't live and breathe inflation targeting and if it should be changed. but the chattering classes, the opinion-setters, i think, do watch. and it matters. you know. >> thank you. >> eric, two questions. one is, so is there some institutional inertia practice that prevents the fed from doing what the bank of canada does? or is it a fear of what the markets might say? or is it just maybe the time wasn't ripe, now it is? what's your sense? >> there's nothing that prevents us from doing it. so any one of those january meetings could actually be doing exactly what the bank of canada does. so there's nothing institutionally that prevents us from doing it. i do think when you don't have a
regularized process, there's a lot of inertia in any bureaucracy. and i don't think the central bank's any different than any other governmental or in many business organizations that, this is a process that actually is forcing a discussion. and it hasn't been our tradition, it didn't start out as a tradition at the bank of canada either, doesn't sound like. so i think it's more -- you certainly in the middle of a crisis, as highlighted, would be a difficult time to be talking about completely changing your framework. there's so many other things that you're worried about. and it would be very difficult to communicate to the public more broadly about why you're doing it in the middle of a crisis. but i do think that once you're out of the crisis, you have a little more perspective. it's a little bit easier to have that discussion, i think. the idea that when you're close to full employment, when you're close to your 2% inflation target, isn't a bad time to be reflecting. so i think one reason for you having this conference is we've had enough time to develop to
say that, maybe we need to think about monetary policy and fiscal policy buffers in a little more coherent fashion. and so i think there is an opportunity to do it if there was willingness among the f1c to do so. >> then i promised to read your speech later in the week. i want to understand what you were talking about. you're suggesting instead of saying we have a 2% inflation target, we have a range, say, 1% to 3%, 1.5% to 2.5%? how does that make things better? you can decide we want to be a little higher, a little lower, or what this. >> took an inflation range of 1.5% to 3%. if you're a period of high productivity and population growth, you probably don't have to worry about hitting the zero bound as much and lowering that range. if you're in a period where the labor force is growing slowly and productivity is very weak, you're worried about hitting the zero lower bound, much more likely in the next recession, then you might choose to be higher in that inflation range.
so that it gives you a little bit more flexibility to say, the optimal inflation rate isn't fixed over time, if you picked a range from 1.5% to 3% it actually isn't going to be -- it's not like picking a 4%, 5%, which is the numbers that some people have picked. i think if you think of population growth and immigration and productivity are going to stay constant, you wouldn't make any changes. but if you're in a world where those things actually can change, and sometimes do change, then saying that having the exact same inflation rate regardless of what's happening with productivity, regardless of what's happening with population growth, regardless of what's happening to immigration, there is a -- enough fixing of the inflation rate you're going to get a suboptimal result. having wiggle room to think about what the optimal inflation rate is for that time without having it so wide that you have to worry about it's different than the price --
>> i won't belabor this, but would you then disclose that we think we're kind of headed towards the high end as an objective? >> so we're still following a few wall mandate, but we have a range that says we're going to factor in a little with more about what is the likelihood we get the zero lower bound? so there is a cost. if we hit the zero lower bound frequently and very hard, like larry summers did discuss. and i do think we're in an environment right now where we're likely to have fairly low interest rates. so i think there are -- we haven't talked a lot about what the costs are. larry gave some numbers. but i do think that monetary policy effectiveness at the zero lower bound is not nearly as -- we can't get out of that situation as easily as we have thought. in fact, the fact that neither europe nor japan have gotten out of that situation yet indicates how difficult it can actually be. i think we have did take that and think a little bit about what does it mean if once you hit the zero lower bound, you
may be there for a prolonged period? what does a prolonged period of very low interest rates mean? incremental quality issues, the difference between savers and investors. there are lots of things that you have to think about in terms of financial stability if you have long periods of very low interest rates. i think factoring those in should give you a little bit more flexibility in your monetary policy framework than what we currently have. >> thank you. peter hooper? >> where yas the bank of canada's review it is with ministry of finance, in the united states it would be with congress. the other question for both panelists, what are the significant costs of inflation at 3% versus 1.5% or 2%?
>> i won't be very original. sort of repeating some of the arguments that we and others laid out early on. but somewhat just relates to equity. being fair to people. not having arbitrary redistributions of income. and you know that a large part of the inflation is regressive. that those stable to protect themselves, often the poorest, have a more difficult time than those that can accommodate it more easily. and some of it, a lot of it is efficiency arguments. that while there isn't a big difference, admittedly, between 2% and 3%, or 2% and 4%, but in terms of what it does to inflation uncertainty, looking ahead, it's enormous. a lot of people don't realize that even with 2% inflation, price levels double every 35 years. and for many people, that kind of corresponds to their retirement period.
so you've got more uncertainty about the economic environment, whereas something closer to price stability provides more certainty. it contributes at the margin to better decision-making, better planning, than you'd have otherwise. so it's sort of this equity efficiency, surely things would work better notion. i don't know if that answers the question. i think that's where a lot of -- some of us would still be. there are offsets to that. those were mentioned. the bias in the measure. the nominal weighting that might occur. hitting the effective lower bound. but -- >> did you have in mind there would be a deal in place -- >> in the range of 1.5% to 3%, i don't think most people are going to notice. so we've been undershooting for most of the last five years. if we'd exactly hit 2%, i think the world would be dramatically
different? probably not. i wouldn't want to pick a range that's much higher. but i do think in that range, it would be hard to argue there would be big differences between 1.5%, 2%, and 2.5%. where i would worry is what is the likelihood i hit the zero lower bound, may be very different at 1.5% than at 2%, 2.5%, depending what else is happening in the world. if i'm in a world where labor force is growing slowly and we have very low productivity and i'm picking a number of 1.5%, as larry said, you're going to now have an interest rate that's going to be not high enough that the next time you have a recession, you're almost certainly going to hit the zero lower bound. so thinking about if frequently we have to drop interest rates by 400 or 500 basis points, but we don't have enough inflation plus the real interest rate to get to that level before the next recession hits, i think there is an issue about how frequently you want to be in that situation. >> did you anticipate a role for congress in this canadian-style
review? >> so i wouldn't argue necessarily for exactly the canadian style review. but i do think that the federal reserve could have a broader discussion about our framework and why we think the current framework is the appropriate framework. and i think as part of that, there should be public questions that would be shared publicly, including with congress. and that if we were to decide the framework, there would have to be consultations with the various banking committees to talk about, we've had this extensive discussion, we've done a lot of studies, and this is why our interpretation of the dual mandate that is we're not following it opt male with the current framework. >> thank you. >> so i do very much agree that a careful, thorough framework review would be a good thing at this point. but i think it also comes out from the discussion how different a political economy context is and the governance context. there are clearly some risks involved in a higher-profile, more open, more politically
engaged process here that may not exist in canada or at least not to the same degree. so i just wanted to press, particularly eric. what is it that we cannot achieve by simply interpreting the existing symmetric inflation target more aggressively? >> we start with -- i think there are costs to having a review. and there are risks that instead of being a technical discussion, it becomes a partisan political discussion. seems like bank of canada gives us an example that that doesn't necessarily have to happen. and i do think that there also are costs to having the wrong framework. and those costs are the ones that larry summers and others this afternoon discussed. so i think there are other ways that you can broaden it out. for example, the example of taking an average over a longer period of time has some attributes of that. but i do think that it does help
to actually talk about it in a public way. communicate it clearly. and whatever your framework is, it's going to make a difference for policy. so if i'm picking a five-year average or a one-year average or only looking forward, i'm going to have a different policy prescription. so when i'm thinking about my monetary policy and what interest rate is optimal, it's within the framework we adopted in january. if we had a price level target right now i'd not be recommending the same monetary policy prescription as the current framework that we have. to the earlier question that kristin was talking about, frameworks make a big difference, because our policy path would be different depending on which framework we pick the. how much risk you're willing to take for inflation being above 2%, or being above 2% for an extended period of time, would depend which of the various frameworks you thought was the appropriate framework. i think it is important to have a lot of agreement, not only on the committee, but more broadly with congress and the public more generally, about what the
framework should be. and then it's our responsibility to follow that framework, even if it's not the framework that i personally would pick. >> so one of the measures of a conference like this is that i've learned since i've come to brookings that afterwards people ask you, what did you learn? usual ly i have to think about this for a while to decide. i think one of the things i've learned today is that there are moments at which asking questions like this feel really appropriate. and this certainly seems to be such an appropriate moment. i want to thank all the large number of people who participated today. as i said, we hope to synthesize this because i have a feeling that as ben bernanke suggested earlier, that this is a conversation that will be ongoing and probably with increasing volume over the next year and a half or so. secondly, i'd like to thank the hutchens center staff, carrie granite, howen chen, sage belt,
vivian lee, mike did a very nice explaining about some of these issues on our website. and finally i want to thank all of you, particularly the people who sat here for over four hours to talk about monetary frameworks. you're my heroes. next week, c-span's cities tour brings you to newport, rhode island. we will explore new ports rich
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